Why can’t investors pick the right index fund?
Despite the dramatic growth of index funds over the past decades, I find that investors leave large amounts of money on the table when investing in this product. I show that fees are a remarkable predictor of future fund performance and yet investors have little sensitivity to fees when choosing in which funds to invest. I find that most of the puzzling behavior comes from the retail segment where investors frequently allocate to high cost funds, an effect exacerbated by investment managers compensating brokers to sell their funds. I also find evidence that the rise in popularity of 401(k) plans may help reduce this puzzle. Together, this evidence suggests the presence of fiduciary duties imposed on fund intermediaries improves investor welfare
Meeting ID: 985 1698 8176